Commercial Real Estate Appraisals Sales Comparison Approach

Commercial Real Estate Appraisal

Sales Comparison Approach

The sales comparison approach is the most intuitive and best understood of the three approaches to value. Home buyers, companies renting office space and real estate investors all utilize this approach. Comparable sales are often referred to as comps and rental comparables are often referred to as rent comps.

Performing the sales comparison approach includes selecting sales comparables and making appropriate adjustments. Selecting comparables if often the more challenging step. There are minor nuances which are not obvious. The process of accurately making adjustments requires research, skill and experience.

Selecting comparable sales is the most critical aspect of the sales comparison approach. Truly comparable sales must be utilized for value indication to be meaningful and impact the final result for less than sales which are not comparable.

Appraisers usually focus on land use (type of property) location, size, age and date of sale when selecting comparable sales. Selecting sales comparables involves selecting which feature (location, size, age and date of sale) are most meaningful. Since real estate is not fungible and sales occur periodically, comparables are never identical to the subject property.

Comparable sales should be the same land use as the subject property in virtually all cases. If a property is being appraised as renovated, the comparables should be the property type as renovated.

Current trends, recent history and nuances for a property type influence which issues should be given most emphasis. For example, if property values have increased rapidly, the date of sale likely is more important than age. If property values have been stable and location adjustments are difficult to determine, location should be given more consideration in selecting sales. Climate controlled self storage properties have dramatically different rental rates than self storage facilities without climate control. In most cases, using climate controlled self storage facilities to value a self storage facility without climate control would not be appropriate.

Both the net and gross amount of adjustments made to reconcile the comparable to the subject property are indicative of the quality of the comparable sales. The sales comparison approach is most credible and reliable when adjustments are minimal.

Appraisers use a variety of techniques to make adjustments to comparable sales. These include the matched pair sales technique discussions with buyers, sellers and brokers, regression analysis, discussions with other appraisers, personal observation and experience. The matched pair technique is to locate two sales which are identical except for one issue. The difference in sales price is evaluate to determine the appropriate adjustment.

The ranking technique is a helpful approach when performing the sales comparison approach. Sales are ranked from most desirable to least desirable, with the price per square foot or unit listed beside each sale. The sales which are most comparable to the subject property provide an indication of value (on a per square foot or per unit basis.)

The quantity and quality of data available to perform the sales comparison approach impacts its accuracy. For homogenous properties such as entry-level housing, it is quite reliable and given primary emphasis. For income properties, the sales comparison approach is often used to double-check the value conclusion from the income approach. The sales comparison approach is typically given primary emphasis for owner-occupied commercial properties.